Britain’s interest rate-setting body voted on Thursday to hold rates at their current record low of half a percentage point and to refrain from any further efforts to boost demand by stepping up its gilt purchases, a measure known as quantitative easing.
The Bank of England’s Monetary Policy Committee’s decision was largely predicted by economists after a survey of the services sector– which accounts for three-quarters of the UK economy – showed that activity proved more robust in May than many had expected.
Indeed, some of the data published this week suggest that the recent gloomy results from a survey of employers in the manufacturing sector may have been more statistical outlier than economic bellwether.
Since the start of the week, figures on employment in the manufacturing sector, housing, construction and retail sales have all pointed to an economy that is growing – albeit slowly – but certainly not contracting. The last report on employment suggested that job losses in the private sector were falling.
However, economists expressed scepticism that the MPC’s asset purchasing programme has run its course, particularly if the banking and sovereign debt crisis in the eurozone – which is already in recession – remains unresolved.
“Growth is so weak that more stimulus is needed,” said Brian Hilliard, economist at Société Générale. The bank has cut its forecast for UK growth this year to 0.1 per cent from its previous estimate of 1.6 per cent. “The question is when, not if,” more stimulus will come, Mr Hilliard added.
But Michael Saunders, economist at Citi, said the MPC may have wanted to hold back from action this month in part because its inflation forecasts have often been wrong in the past few years and the committee now looks for more cues from economic data to decide if increased stimulus is needed. “They are worried about the stickiness of inflation because they got it so badly wrong for the past few years,” he said.
But the scale of government austerity planned for next year – equal to 1.5 per cent of GDP – is so large that it is impossible to imagine that more monetary stimulus will not be needed, as well as some slowdown in the pace of the spending cuts, Mr Saunders said.
As recently as the end of last week, economists had been forecasting the strong possibility of a move to increase asset purchases from the current £325bn stockpile. Gross domestic product contracted even more than was initially reported in the first quarter of the year and turmoil in the eurozone is undermining business confidence.
Moreover, the pound has gained “haven” currency status and has risen in recent weeks. Although this has brought good news on inflation, it has been disadvantageous to manufacturers who had been able to boost their export orders thanks to the weaker pound.
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